This week's question comes from one of our newest experts, Cindy Gillespie. Gillespie served as an adviser to former Massachusetts Gov. Mitt Romney during the state's health reform efforts, and now leads the health care policy team at McKenna Long & Aldridge.

"In addition to the individual and small business exchanges mandated under PPACA, private exchanges are emerging as potential vehicles for innovation in the way employers offer coverage to their workforce.

For example, WellPoint recently announced the acquisition of Bloom Health, through which 20,000 employees at 50 companies purchase coverage using pre-tax dollars and a defined contribution from their employers.

What impact do you think that exchanges, public and private, will have on the employer-sponsored insurance marketplace?"

-- Cindy Gillespie

And to add an additional question of my own: How will private exchanges affect state and federal exchanges set to be up and running in 2014?

September 28, 2011 6:05 PM

Private Exchanges: A Game Changer?

Today, 26 States and the United States Department of Justice filed requests for the Supreme Court to review the constitutionality of the Affordable Care Act (ACA). Whatever the outcome of this highly anticipated court case, a perhaps unforeseen consequence of the law is that it has created an environment where employers of all sizes have begun discussing and looking at alternative mechanisms for offering health insurance to their employees. Before the ACA, any large employer that dared to imply that it might stop providing coverage through a defined benefit model, where the employer uses its purchasing power to negotiate with insurance carriers and agrees to pay a percentage of the premium for their employees, was frowned upon. But the public exchanges mandated in the ACA for individuals and small businesses have created an awareness among large employers that exchanges, particularly private exchanges, can provide another model for offering insurance - and there’s much to make this model attractive. Two features, in particular, provide reason to believe that private exc...

Today, 26 States and the United States Department of Justice filed requests for the Supreme Court to review the constitutionality of the Affordable Care Act (ACA). Whatever the outcome of this highly anticipated court case, a perhaps unforeseen consequence of the law is that it has created an environment where employers of all sizes have begun discussing and looking at alternative mechanisms for offering health insurance to their employees. Before the ACA, any large employer that dared to imply that it might stop providing coverage through a defined benefit model, where the employer uses its purchasing power to negotiate with insurance carriers and agrees to pay a percentage of the premium for their employees, was frowned upon. But the public exchanges mandated in the ACA for individuals and small businesses have created an awareness among large employers that exchanges, particularly private exchanges, can provide another model for offering insurance - and there’s much to make this model attractive. Two features, in particular, provide reason to believe that private exchanges could become a serious alternative to current channels for the purchase of insurance by employers.

The first is that exchanges can enable employers to make a set, defined contribution toward coverage. Just as most employers shifted from a defined benefit “pension” program for employee retirement to a defined contribution 401(k) program years ago, private exchanges allow employers to make the same shift in health insurance.

The second potentially attractive feature of exchanges allows employees a “Travelocity”-like shopping experience of selecting from a wide range of plans (rather than the handful traditionally chosen by employers), and combining their (pre-tax) contribution with their employer’s share. For years, policy-makers and health economists have documented the potential of consumer-driven models of health insurance that focus on transparency, information, and individual purchasing power to bend the cost curve. However, the predominance of the traditional employer-choice, defined benefit model has always stood in the way. Private exchanges elegantly break through this impediment and offer a way for employers to continue their central role in providing subsidies for health insurance yet, at the same time, shift to a model where the employee has more responsibility, choice, and personal interest in choosing their coverage and making health care decisions. At the same time, employers gain certainty around health insurance costs by shifting to a defined contribution model. For many, this appears to be a win-win.

If the ACA survives the court challenges and the entitlement reforms ahead a private exchange may be an even more attractive option for many large employers. The new IRS rules that set 9.5% of the lowest cost self-only plan offered by an employer as the “safe harbor” for an employer to comply with affordability requirements can be easily met through a private exchange that offers a variety of plan options for employees, with the employer pegging its defined contribution on the lowest cost self-only plan offered through the exchange. If the ACA doesn’t survive the challenges ahead, employers can be expected to continue looking at the benefits of shifting to a defined contribution, employee choice model through an exchange. There’s a reason that large investments are now being made by businesses in private exchanges, and it’s not because large employers are thinking of dropping health insurance and using the public, ACA-mandated exchanges for their employees. It is the potential of private exchanges to unleash the forces of individual purchasing power, consumerism, and defined contribution into the insurance market on a new scale, and the betting money should be on private exchanges as a burgeoning distribution channel for employer-sponsored health insurance – ACA or no ACA. It may not be what the Obama Administration intended, but this genie is now out of the bottle.

The “agree” function has been temporarily disabled from the blog while we transition to a new system. The National Journal Group has the right (but not the obligation) to monitor the comments and to remove any materials it deems inappropriate.